John Erb - Chairman and Chief Executive Officer Claudia Drayton - Chief Financial Officer Molly Wade - Senior Vice President of Strategic Operations.

Jan Wald - Benchmark.

Good day, ladies and gentlemen, and welcome to the Sunshine Heart Incorporated Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded.

Before we start, I would like to remark briefly about forward-looking statements. Except for historical information mentioned during the conference call, statements made by the management of Sunshine Heart are forward-looking statements that are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve known and unknown risks and uncertainties that are based on management’s beliefs, assumptions, expectations and information currently available to management.

Those risk includes, but are not limited to risks associated with the possibility that the company’s clinical studies do not meet their enrollment goals, meet their endpoints or otherwise fail that regulatory authorities do not accept the company’s application or approve the marketing of the company’s products, the possibility that the company may be unable to raise the funds necessary for development and commercialization of its products that the company may not be able to commercialize it product successfully that the company may not be able to successfully integrate acquired businesses that the company may not realize anticipated synergies and benefits from acquired businesses and the other risk factors described under the caption Risk Factors and elsewhere in the company’s filings with the Securities and Exchange Commission.

By providing this information, the Company undertakes no obligation to update or revise any projections or forward-looking statements, whether as a result of new information, new developments or otherwise.

You should review the cautionary statements and discussion risk factors included in the company’s press release issued today, the company’s latest 10-K, subsequent reports as well as its other filings with the Securities and Exchange Commission under the titles Risk Factors or Cautionary Statements related to forward-looking statements.

For additional discussion of risk factors that cause actual results to differ materially from management’s current expectations and those discussions regarding risk factors as well as the discussion of forward-looking statements in such sections are incorporated by reference in this call and are readily available on the company’s website at www.sunshineheart.com.

During this call, management will also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in the company’s earnings press release and supplemental information.

In addition, a replay of this call is provided through a link on the Investor Relations section of the company’s website. With that said, I would now like to turn the call over to John Erb, Sunshine Heart’s Chief Executive Officer and Chairman of the Board..

the console, which is a piece of capital equipment with a list price of $28,500 and is about the size of a coffee maker; there’s a is one-time use disposable blood circuit set with a list price of $900; and a small dual-lumen peripheral catheter that simultaneously withdraws blood and returns filtered blood to the patient's arm.

Aquadex is unique proprietary product that is used for the temporary ultrafiltration treatment of patients with fluid overload. Ultrafiltration is a process that removes water and sodium from a patient in a manner similar to how the kidney functions.

Fluid overload, a condition that is prevalent in heart failure patients can lead to decompensation resulting in lengthy and costly hospitalizations. There are over 1 million hospitalizations per year in the U.S. for acute heart failure and approximately 90% present with symptoms of fluid overload.

Aquadex is primarily used to treat fluid overloading congestive heart failure patients and has been shown in randomized controlled clinical trials to reduce both the length of stay in hospitals and repeat hospitalizations.

Aquadex allows us to maintain and strengthen our presence in the heart failure as the primary sales call point is the heart failure cardiologist.

We intend to grow the Aquadex business by providing superior service to our customers through our direct field organization, our in-house customer service team, our technical service team and our clinical education efforts. We are actively focused on strengthening our capabilities in all of these areas.

We will execute our growth strategy in deliberate stages. Initially we are focusing on the top 55 hospital accounts that generated 80% of the revenue in 2015. Next we’ll expand our efforts to reengage the additional 110 hospital accounts that also purchase blood sets in 2015.

In addition, we will focus on reeducating customers to help increase the utilization of Aquadex consoles that we know were owned by an additional 200 hospital accounts prior to 2015. There is currently a large installed base of over 500 consoles in U.S. hospitals and the business model is similar to the simple razor, razor blade model.

Once a console is acquired by a hospital, we work to increase utilization of the consoles with ongoing purchases of the disposable blood sets. We had ownership of the Aquadex business for just eight weeks into Q3. During this time of transition, while we were getting our team up to speed, we were encouraged to see 46 U.S.

hospitals purchase 480 disposable blood sets. Over this time period, we began re-engaging dormant accounts and sold additional blood sets to eight hospitals that have not purchased any product in over a year.

Of course we will be opportunistic about opening new accounts when possible, but our initial sales focus in 2017 will be on increasing the utilization of blood sets in the accounts that already have Aquadex consoles.

We are also excited by some early initiatives that will increase the evidence basis for use of Aquadex in the outpatient setting by collecting post-market clinical data. We plan to partner with several high profile institutions in this effort and more details will be forthcoming in future communications.

We are confident that the measures we are taking will help us attain a targeted fourth quarter 2016 revenue run rate of approximately $5 million per year and a fourth quarter 2017 revenue run rate of approximately $10 million per year. Before I turn the call over to Claudia, let me quickly update you on the status of our NASDAQ listing.

Our strong desire is to continue to remain listed on NASDAQ. We have a hearing at NASDAQ in mid-November to petition for a further extension of time so that we can meet the NASDAQ listing requirements. While we can't predict the outcome of that hearing, we intend to make a strong case and we will update you when we have additional information.

I will now turn the call over to Claudia who can walk you through our Q3 results and some key financial details. Following that, I will provide some closing comments before taking your questions..

Thanks, John. Good morning everyone. Turning to the P&L, this is the first quarter we generated revenue from our newly acquired Aquadex business. Revenue from the post acquisition period from August 05 to September 30 was $484,000 and it resulted mainly from the sale of disposable blood sets and catheters.

During the first 90 days post acquisition, we worked on transitioning order taking and fulfillment from prior management to our internal team of Sunshine Heart. We are happy to report that after the end of the quarter, all of these activities have successfully transitioned to our in-house team.

Having instant visibility to our sales activity will allow us to more effectively track and monitor the performance of our customer accounts and field personnel.

During the quarter, we also recorded 59,000 of clinical revenue with burning plant that occurred under our COUNTER-HF study prior to the announcement earlier this year that we were no longer enrolling patients in a trial.

Cost of sales reflected price estate for inventory on their manufacturing and services agreement we signed at the time of acquisition. Under this pricing structure, we expect our gross margin to be around 60% or a bit higher.

In terms of operating expenses for the third quarter, a total of $4.4 million, a decrease of about $1.9 million from the same period last year. In addition, during the quarter, we expensed approximately $900,000 of transaction related costs for the acquisition of the Aquadex product line.

Exclusive of these costs, our operating expenses would have decreased by $2.8 million versus last year.

The decrease in expenditures reflect lower clinical spending resulting from the announcement earlier in the year that we will no longer enrolling patients in clinical studies from the consolidation and streamlining of activities in all areas of the company and from reduced stock-compensation expense.

In terms of non-operating expenses during the quarter, we incurred approximately $500,000 in expenses related to the early payoff of our term loan with Silicon Valley Bank. These expenses related mainly to the accelerated write off of unamortized warrants, final interest payment in that issuance costs.

Additionally, during the quarter, we recognized an unrealized gain of approximately $600,000 related to the change in fair value of the warrants that were issued in connection with July equity raise. Finally, our net loss for the period was $3.9 million compared to a net loss of $6.6 million for the third quarter of 2015.

In terms of our cash position at the end of the third quarter, we had approximately $800,000 in cash and cash equivalents and no debt. During the quarter, we completed an equity financing for gross proceeds of $3.5 million by issuing convertible preferred stock and warrants to purchase common stock.

In August, we repaid the entire $6 million loan that was outstanding with Silicon Valley Bank and paid $4 million in cash for the acquisition of Aquadex plus approximately $900,000 in fees and expenses related to the closing of this transaction.

Subsequent to quarter-end, we sign on a new round of financing for gross proceeds of approximately $3.8 million in exchange for convertible preferred shares and warrants to purchase of common stock. In terms of modeling Q4 revenue, we expect to exit the year with an annualized quarterly run rate of about $5 million.

Regarding our operating expenses, we expect to continue to show meaningful reduction versus last year even after some modest investments in our Aquadex business. Our spending reduction should continue to reflect the steps that we’ve taken to reduce our cash burn going forward in the impact of the revised strategy that John discussed earlier.

In terms of financing, we continue to evaluate at options and we’re carefully analyzing our capital needs based on our revised strategy. We are working diligently to grow the business and invest judiciously to bring it to a breakeven point as soon as possible.

In the meantime, we will look for additional financings to provide us with the necessary capital to get to a point where the business is self-sustaining. I will now turn the call back over to John..

Thank you, Claudia. Before opening the phone line up for questions, let me reiterate that I remain very optimistic. We know we have a lot of work ahead of us, but I believe we are moving in the right strategic direction. The entire management team is rising to the challenges in front of us and we are focused on delivering results.

We will continue to provide milestones to track our progress over the coming quarters. We believe this will allow us to strengthen our credibility over time.

Operator, are there any questions?.

[Operator Instructions] And we do have a question from the line of Jan Wald from Benchmark, and your line is open..

Thank you. Good morning John and good luck on the new efforts..

Thank you, Jan..

One question I have is I guess related to Aquadex. That was a business sort of late dormant for a while until you acquired. Now you’re trying to be excited. What is the market telling you? Is there people that are using it? Are they basically satisfied with it because they continue to use it and effectively increasing.

What about going into the new hospitals once you go deeper into the hospitals you are at, do you think this is a product that will gain traction?.

Well, I do believe so. Right now as it stands, there's a large installed base and there are actually over 360 hospitals that have acquired the console and have made purchase of disposables in the past. As I said in my comments, in 2015 there were 55 hospitals that made up 80% of that 2015 volume.

So there is a great opportunity for us just to go backend to the hospitals that have already made a commitment to implement the therapy. I think the biggest new growth area is in the outpatient market.

There's obviously a lot of pressure on hospitals around managing costs, the heart failure patients are typically the frequent flyers that find themselves back in the hospital regularly.

With the Affordable Care Act, hospitals are penalized if they don't treat a patient and keep them out of the hospital for more than 30 days, and there are several opportunities where we are engaging with hospital accounts to set up outpatient clinics to treat patients in the outpatient market.

There are others that we're in the midst of that I hope to be able to announce in the not-too-distant future, but that's a great opportunity.

I really see our efforts going to the large installed base that's already existing, re-engaging and revitalizing that business and simultaneously working on a strategy to develop the outpatient market in this affordable care environment.

Molly, I don’t know if you would add anything to that?.

Yes, thanks, John. Good morning, Jan. I think just to amplify what John said, one of our strategic objective that offer the partner with those Aquadex centers of excellence. So 55 accounts who have established strong standing orders on, when to use the product, when to initiate therapy and when to stop therapy.

And utilizing those guidelines and expanding to that large installed base to really help them understand when to prescribe it, move that therapy upstream and when to stop the therapy.

So taking some of the guest to those hospitals that haven’t used it and providing these guidelines that are centers of excellence that are using Aquadex really believe that the therapy works and getting into those other accounts who may have gone dormant level of therapy whether being sold out in the field..

Okay.

And I guess since it is a razor blade type model, what the same-store sales look like now and what do you think it can get to in 12 months?.

I'm not sure that we have all the data really to give you a good solid answer on that as we are re-engaging with these hospital accounts, we’re really understanding who's prescribing the therapy, where they are prescribing it, whether it's in the ER, whether it's in the primary floor, or whether it's intensive care.

And we’re working hard to really pull that data together so that we have a very clear focus on what we’re going after..

I think to that point, Jan, one of the opportunities that we’ve got with the Center of Excellence is that really trying to move the therapy upstream.

So instead of waiting till that patient in the hospital on their fourth day DRG payment, making sure they are seen by the heart failure cardiologist within the first 24 hours of admit for fluid overload and that they start Aquadex earlier and that’s really produced some very positive results that we want to be able to take and replicate with multi-centers..

And I guess you are starting a clinical program, could you talk a little bit about what that program is going to look like going forward?.

Again, it's a bit early for me to be very specific, but we’ve actually have approval, I should say, 5k, 10k market clearance for inpatient use and outpatient use, so a clinical program, we’re really focused on that outpatient market and reimbursement. Today, the therapy in the hospital is basically covered under the DRG.

Anything that can reduce the length of stay for these hospitals under that 4-day average DRG payment schedule is a big advantage to them. The actual average hospital stay for heart failure patient is 5.5 days, so there's real opportunity there. But we really see the reimbursement for outpatient as a key area to provide that clinical support..

Okay. And I guess I’d be remiss if I didn’t ask about NASDAQ, and I realize you don’t know what the outcome is going to be going in, but how good you feel about going into [indiscernible] and what do you – I guess that’s the question. I was going to ask you a few, how you feel – do you feel good about getting it, but I wouldn’t know myself. So….

I have to be – obviously, we have done a lot of detailed strategy and homework on what's required and how can we achieve the requirements that are necessary to stay listed on NASDAQ. We've hired an attorney that specializes in helping companies through this process.

He actually spent over 20 years at NASDAQ himself, so he's provided some excellent guidance. So we are working our strategy and look forward to a positive outcome, but we never can tell..

All right. Thank you and again good luck on your endeavor..

Thank you..

[Operator Instructions] And at this time, I’m showing no further questions. I’d like to turn the call back over to Mr. John Erb, Chief Executive Officer and Chairman of the Board..

Thank you, operator. And I just want to say thank you very much for all of you that did join the call. And this will conclude it and wish you all a very good day. Thank you..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. You may now disconnect. Everybody have a great day..